16 August 2018

Software, goods or services and back again

Demonstrating the challenges faced by today’s Courts in keeping up with technological advances, the Court of Appeal has recently overturned a 2016 High Court decision that software supplied only by electronic means is to be treated as ‘goods’ under the Commercial Agents (Council Directive) Regulations 1993 (CAR).

 

Electronically supplied software is services, again.

 

What did the 2016 High Court decision mean?

 

The High Court’s decision in Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587 (QB) (01 July 2016) led to a confusing landscape. Software supplied electronically and not on any tangible medium, such as on a USB stick or CD, was to be classed as ‘goods’, not ‘services’ under the CAR, in conflict with previous cases on the issue.

 

Prior to the 2016 decision, software supplied only through electronic means, for example a website download, was construed as services, while software supplied on tangible media, such as a USB stick, was classed as goods under the CAR. The 2016 decision altered this position, finding that electronically supplied software was goods under the CAR, in part due to such software being treated as a commoditised, commercial product in reality.

 

Our 2016 article on the High Court decision can be found HERE.

 

The significance of this decision was due to the sudden applicability of the CAR to agency appointments involving electronically supplied software. The CAR provides protection to agents upon termination of their appointment, potentially resulting in the principal being liable to pay significant compensatory or indemnity based termination payments. The CAR only applies where an agent is appointed to sell or purchase goods on the principal’s behalf. Following the 2016 decision, while electronically supplied software was classed as goods, principals have potentially been liable to make these termination payments under the CAR in respect of such agents.

 

What is the position now?

 

The Court of Appeal’s recent decision to overturn Waksman J’s 2016 High Court decision (Computer Associates UK Ltd -v- The Software Incubator Ltd [2018] EWCA Civ 518) (19 March 2018) has reverted the classification of software, supplied electronically and not on any tangible medium, to services under the CAR.

 

As services once again, the CAR does not apply to agents dealing in electronically supplied software, therefore removing the additional protections afforded to them under the CAR. This brings the CAR in line with the approach under the Sales of Goods Act 1979.

 

How does this work in reality?

 

The overturning of the 2016 High Court decision is a poignant example of the difficulties faced in a world of fast developing technology and a legal system that is trying to keep up. The Court of Appeal’s decision was arguably expected given the wider legal context of the position under the Sales of Goods Act, at least in a business to business context.

 

More modern consumer legislation, the Consumer Rights Act 2015, instead deals with electronically supplied software as an entirely separate category of product, ‘digital content’, defined as data which is produced and supplied in digital form. Under the Consumer Rights Act, digital content is treated as analogous to goods, with fitness for purpose and satisfactory quality terms being implied into consumer contracts.

 

While this new decision creates legislative uniformity in non-consumer facing legislation, the CAR and the Sales of Goods Act, it also reinstates a confusing approach on a practical level. Software supplied solely by an electronic download is services while the same software supplied by a USB stick is goods. This creates a situation where the method of delivery, in effect, determines whether or not the CAR applies to an agent’s appointment.

 

In the Court of Appeal decision, Lady Justice Gloster recognised that such an approach might appear to be out-moded in the light of technological advances. Despite this concern, Lady Justice Gloster found that the weight of authorities designating electronically supplied software as services in other areas of law, to be too compelling to overcome this. Lady Justice Gloster’s judgement highlights that reform in such cases must come from Parliament or the EU legislature and not from the Courts.

 

So, what does the future hold?

 

Whether electronically supplied software amounts to goods or services is not just an issue relevant to the CAR but one which is integral to numerous pieces of legislation, not least the Sales of Goods Act. The legal limbo left after the 2016 High Court decision under which electronically supplied software was goods under the CAR, but services under the Sales of Goods Act has been rectified, for now. While this is a helpful clarification, it fails to resolve the ongoing issue of unifying the economic realities of the provision of software and the legal position. After all, is there really a difference between software supplied on a USB stick and software downloaded from a website?

 

It is for Parliament and, prior to Brexit, the EU legislature to implement reform in this area should it consider this necessary. While the EU’s strategy for the Digital Single Market indicates this as an area earmarked for reform, the current focus seems to be on consumer rather than business to business laws. In the meantime this is an area that should be watched carefully as it develops.

 

If you’d like any assistance in considering the steps you should be taking to manage relationships between your business and its commercial agents, please contact Eleanor Russell-Smith at erussell-smith@shulmans.co.uk or on 0113 288 2838.

 

Our 2016 article on the High Court decision may be viewed HERE.